y six per cent.,
and himself accept the risk of exchange.
What the foregoing means will perhaps become more clear if it is
realized that in the first case the American agent of the foreign
lender draws a ninety days' sight sterling bill for, say, L100,000 on
the lender, and hands the actual bill over to the parties here who want
the money. Upon the latter falls the task of selling the bill, and,
ninety days later, when the time of repayment comes, the duty of
returning a _demand_ bill for L100,000, plus the stipulated commission.
In the second kind of a loan the borrower has nothing to do with the
exchange part of the transaction, the American banking agent of the
foreign lender turning over to the borrower not a sterling draft but
the dollar proceeds of a sterling draft. How the exchange market
fluctuates in the meantime--what rate may have to be paid at the end of
ninety days for the necessary demand draft--concerns the borrower not
at all. He received dollars in the first place, and when the loan comes
due he pays back dollars, plus four, five or six per cent., as the case
may be. What rate has to be paid for the demand exchange affects the
banker only, not the borrower.
Loans made under the first conditions are known as sterling, mark, or
franc loans; the other kind are usually called "currency loans." At the
risk of repetition, it is to be said that in the case of sterling loans
the borrower pays a flat commission and takes the risk of what rate he
may have to pay for demand exchange when the loan comes due. In the
case of a currency loan the borrower knows nothing about the foreign
exchange transaction. He receives dollars, and pays them back with a
fixed rate of interest, leaving the whole question and risk of exchange
to the lending banker.
To illustrate the mechanism of one of these sterling loans. Suppose the
London Bank, Ltd., to have arranged with the New York Bank to have the
latter loan out L100,000 in the New York market. The New York Bank
draws L100,000 of ninety days' sight bills, and, satisfactory
collateral having been deposited, turns them over to the brokerage
house of Smith & Jones. Smith & Jones at once sell the L100,000,
receiving therefor, say, $484,000.
The bills sold by Smith & Jones find their way to London by the first
steamer, are accepted and discounted. Ninety days later they will come
due and have to be paid, and ten days prior to their maturity the New
York Bank will be expecti
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